Last week we pointed out that the crash in oil prices will reduce global liquidity as the revenue of oil exporters falls dramatically.
This raises an interesting question: as petrodollars come out and flows to financial markets are reduced, shrinking the pool of global liquidity, and as the real income of oil consumers increase, will the net result be marginally weaker financial markets and stronger global economic growth?
These countries recycle their oil earnings back into the global financial markets, including the purchase of U.S. Treasury securities. The oil exporters, including Russia and Norway, are the third largest foreign holders of Treasury securities, behind China and Japan.
BNP Paribas reports that this year the flow of petrodollars from energy-exporting countries into world markets will, for for the first time in almost 20 years, turn negative.
The chart below illustrates this, showing petrodollar capital flows peaked in 2006, which contributed to Alan Greenspan’s bond market conundrum and the Fed’s inability to affect long-term interest rates. The forrmer Fed chairman attributes capital inflows as one of major factors causing the credit and housing bubble.
(click here if chart is not observable)